DP6764 Second-Best Institutions
|Publication Date:||March 2008|
|Keyword(s):||economic development, governance|
|Programme Areas:||Public Economics, Development Economics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=6764|
The focus of policy reform in developing countries has moved from getting prices right to getting institutions right, and accordingly countries are increasingly being advised to move towards "best-practice" institutions. This paper argues that appropriate institutions for developing countries are instead "second-best" institutions - those that take into account context-specific market and government failures that cannot be removed in short order. Such institutions will often diverge greatly from best practice. The argument is illustrated using examples from four areas: contract enforcement, entrepreneurship, trade openness, and macroeconomic stability.